Reading Roundup: May 2023

This Month We Read:

• Seeking Wisdom: From Darwin to Munger by Peter Bevelin

• The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs

• King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey and John E. Morris

• Keeping at It by Paul Volcker

• James Patterson by James Patterson: The Stories of My Life by James Patterson

• Unbroken: A World War II Story of Survival, Resilience, and Redemption by Laura Hillenbrand

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Seeking Wisdom: From Darwin to Munger by Peter Bevelin

I bought a couple of Peter Bevelin books at the Berkshire meeting, as they’ve always been on my list but I haven’t gotten around to them until now. They didn’t disappoint.

Seeking Wisdom is a compilation of lessons that Bevelin has taken from some of history’s great thinkers, not least of whom are Buffett and Munger. The book borrows ideas from many of the important disciplines such as mathematics, physics and biology, engineering, psychology, and economics, in an effort to distill a framework to help readers behave more rationally. The theme of the book could be described as; “to be successful, you need to approach the world as it is, not how you wish it was”.

Matt and I look for businesses that are like cockroaches, and Bevelin explains why.

Studies show that different organisms respond differently to environmental stress. But there seems to be one creature that survives and reproduces independent of changes and stresses in the environment - the cockroach. Writer Richard Schweib says in The Cockroach Papers, “If there is a God that made all life forms, a particularly rich blessing was bestowed on the roach, because it got the best design of all”.

The cockroach is the oldest insect on our planet as evidenced by fossil records dating back 325 million years. It can eat almost anything, live 45 days without food, and has an effective reproductive system with female sperm storing capabilities lasting a lifetime and a great defense system. The cockroach is about the same organism it was millions of years ago because its characteristics were adaptive then and now.

We think we’ve assembled a portfolio of businesses that, in aggregate, display many of the traits of a cockroach, and we’re always on the hunt for more.

A few other unrelated tidbits; in 2003 Buffett let his hurdle rate for owning stocks slip.

We love owning common stocks - if they can be purchased at attractive prices…Unless, however, we see a very high probability of at least 10% pre-tax returns, we will sit on the sidelines.

Many of Buffett’s major purchases, both public and private, have clustered around 10x pretax earnings, and it’s clear why. He’s willing to deploy capital in highly predictable businesses if he thinks he’ll earn a 10% earnings yield and get any growth for “free”. More investors should follow this seemingly simple advice.

One more insight outlined in the book is from a 2001 press conference where Buffett outlined his filter for evaluating investment ideas. An investment candidate has to pass the following four criteria or it is quickly discarded:

• Can I understand it? If it passes this filter,

• Does it look like it has some kind of sustainable competitive advantages? If it passes this filter,

• Is the management composed of able and honest people? If it passes this filter,

• Is the price right? If it passes this filter, then we write a check

Notice the order of criteria, which I don’t think is by mistake. Again, simple but profound, like almost everything else Buffett preaches.

Dan

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The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs

Mary Childs, the co-host of NPR’s Planet Money, tells the story of Bill Gross and his rise and fall at PIMCO. Two themes stuck out to me. The first relates to Bill Gross’s rise and coronation as “the bond king” while the second relates to his fall. 

The first theme is asymmetry. Childs’ walks through some of Gross’s biggest trades and they all had an element of “heads I win, tails I don’t lose much.” Once Gross read the fine print in a CME bond futures contract closer than anyone else, realized he could corner the market, and succeeded, making a huge profit. The CME instituted position limits in response.

The second theme is the importance of culture. Gross built PIMCO from the ground up and instilled a toxic, dog-eat-dog work environment that eventually led to his ouster. Childs describes PIMCO as a miserable place to work and describes Bill Gross as a miserable person in general. A business with a toxic culture can skate by for a year or two but eventually it catches up. Gross may have been the bond king but he probably didn’t feel like it when his own company kicked him to the curb. Toxic cultures are not sustainable and eventually come to light, truncating returns and compounding.

Matt

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King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey and John E. Morris

The King Of Capital chronicles Steve Schwarzman and his company Blackstone. The book reads like an advertisement for owning a private equity firm. Fortunately many of the largest are now publicly traded. The WSJ recently pointed out that many trade at a discount to their historic median valuation multiples. 

My main takeaway from this book is to appreciate just how adaptable Blackstone and private equity are. Reporters and pundits too often analyze the world as if it is static with inviolable and unchanging rules. However, in a real moment of crisis things can change quickly. Blackstone’s strategy and focus pivoted several times over the years in response to changing marking conditions and investor demands. Alternative asset managers are like a weed that cannot be stopped from growing. 

The other point I took away from this book is that Blackstone doesn’t need a 100% success rate in investments to succeed as a business. Blackstone’s size means any time it loses money it is front page news. But the company is carefully structured to insulate its investments from each other so that one failure doesn’t cause all its other dominoes to come crashing down. 

So next time you read that Blackstone and the other alternative managers are poorly positioned or taking losses, take a moment to pause and consider their ability to endure a little pain and pivot to a better position.

Matt

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Keeping at It by Paul Volcker

Paul Volcker is an underrated American hero in my book. Many today do not know much about Volcker; he was the chairman of the Federal Reserve in the 1980s and was responsible for breaking the back of inflation that roiled the country for a decade prior to his resolute leadership. Who knows where the country would be today without Volcker’s steadfast leadership 40 years ago.

Keeping At It is Volcker’s autobiography written when he was 90 years old in 2018, shortly before he passed away. I think the book is a must read for any investor or anyone hoping to learn from past periods of turmoil in the financial and economic markets. The whole book is filled with helpful history lessons that can be applied today.

One of the most important points is how vital an independent Fed is. Fed chairs cannot be at risk of folding under political or societal pressure, and must do what is best for the country over the long term. When Volcker raised interest rates to 20% to crush inflation, he knowingly crushed the economy with it. It was a tough choice that most people couldn’t make, but he knew it was in the best interest of the country. He explains:

From time to time, I faced highly skeptical, even hostile, questioning in congressional hearings. I didn’t take the threats of impeachment seriously…There was a willingness to endure some near-term pain to conquer inflation. Even in those groups with the most at stake - farm groups, community activists, and home builders - there was understanding.

One rather dramatic occasion for me was reassuring. In January 1982 I was invited to address the annual meeting of the National Association of Home Builders in, of all places, Las Vegas. On my way to the meeting, I happened to run into a rather sour, unfriendly senator. “What are you doing here? The home builders will kill you.”…my message boiled down to the concluding words “Stick with us. Inflation and interest rates will come down. There are a lot of homes to be built.” Standing ovation!

This attitude isn’t all that different than what’s required for successful long-term investing. The willingness to trade short term pain (or uncertainty/volatility) for long term gain is incredibly important for investors.

Our current Fed Chair, Jerome Powell, hasn’t been perfect (an impossible task), but I think he’s pretty damn good. Between COVID and the worst inflation in 40 years, the present Fed has had a lot to contend with. Volcker is one of Powell’s hero’s and we should be thankful for that in today’s fight against inflation.

Dan

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James Patterson by James Patterson: The Stories of My Life by James Patterson

James Patterson is one of the world’s most prolific and best selling authors. He wrote this book about himself in his trademark style — short, fast paced chapters that keep you turning pages.

Patterson is the first to admit that he is not going to win any literary awards. But it’s undeniable that he knows how to tell a good story, which he credits to his background in advertising. He rose from a lowly copywriter to CEO and then left to become a novelist.

“I really didn’t like writing ads, but he made me aware of the importance of every sentence, the importance of one sentence flowing into the next, and how you had to always remember you were talking to an audience—and that audience had absolutely no interest in what you had to say about beer, beans, or beauty cream.”

“I got infamous writing mysteries, so here’s the big mystery plot for this book: How did a shy, introspective kid from a struggling upstate New York river town who didn’t have a lot of guidance or role models go on to become, at thirty-eight, CEO of the advertising agency J. Walter Thompson North America? How did this same person become the bestselling writer in the world? That’s just not possible.

         But it happened. In part because of something else my grandmother preached early and often—hungry dogs run faster.

         And, boy, was I hungry.”

“The day, and it was a day, that writing started to be fun for me, the day things began to really click, was the day I stopped trying to write sentences and started writing stories.”

Patterson sticks out among novelists for using co-writes. In a sense he’s learned to franchise himself. He lends his name and big-picture expertise to a project, but leaves the line by line writing to a co-writer. Any book with Patterson’s name will sell, so this arrangement maximizes Patterson’s volume.

Despite an intense work ethic and prolific publishing schedule, Patterson seems to have found an ease and balance in his life. He credits that to having his priorities straight:

“Imagine life as a game in which you’re juggling five balls in the air.

         Let’s name them work, family, health, friends, and spirit. Somehow you’re keeping all those balls in the air. That’s not an easy thing to do.

         Sound familiar? Sound a little like your life? Well, it definitely sounds like mine.

         Hopefully, you come to understand that work is a rubber ball. If you drop it, it will usually bounce back.

         But the other four balls—family, health, friends, and spirit—are made of glass.

         If you drop one of these, it will be irrevocably scuffed, marked, nicked, damaged, or even shattered. It will never be the same.”

Matt

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Unbroken: A World War II Story of Survival, Resilience, and Redemption by Laura Hillenbrand

I read Unbroken after James Patterson called it out as an exemplary and engaging piece of nonfiction. I agree and highly recommend it to anyone looking for a fast-paced true story that is so outrageous as to be almost unbelievable at times. 

Unbroken is the story of Louis Zamperini who won a gold medal in the 1936 Berlin olympics, was shot down over the Pacific in WW2, survived months at sea, was captured and tortured by the Japanese as a prisoner of war, before returning home to contend with his trauma.

Zamperini’s spirit reminded me of Thomas Russo’s concept of “a capacity to suffer.” A stoic half-glass-full outlook to life’s adventures and mis-adventures is not only the most profitable in the stock market, but also most beneficial for day to day life. Mother nature and the Japanese threw everything they had against Zamperini but they could not break his spirit.

“Though all three men faced the same hardship, their differing perceptions of it appeared to be shaping their fates. Louie and Phil's hope displaced their fear and inspired them to work toward their survival, and each success renewed their physical and emotional vigor. Mac's resignation seemed to paralyze him and the less he participated in their efforts to survive, the more he slipped. Though he did the least, as the days passed, it was he who faded the most. Louie and Phil's optimism, and Mac's hopelessness, were becoming self-fulfilling.”

If you are interested in Zamperini’s story but don’t have time for the book, a 2014 film based on the book (directed by Angelina Jolie and written by the Coen brothers) is a decent substitute.

Matt

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The Best of the Rest

• WSJ: Wendy’s, Google Train Next-Generation Order Taker: an AI Chatbot. “As much as 80% of food orders at Wendy’s are made at the drive-through lane, up from roughly 30% before the Covid-19 pandemic.”

• BRK Daily: What is Buffett's discount rate? “But we don’t put the risk factor in, per se, because essentially, the purity of the idea is that you’re discounting future cash. And it doesn’t make any difference whether cash comes from a risky business or a safe business — so-called safe business.”

• NYT: Investors Are Usually Wrong. I’m One of Them. “Forget about getting everything right. Most people are so consistently wrong that merely avoiding major errors is enough to set you apart from the pack.”

• Old Rope (Substack): Grace, Weschler, 20x Earnings. A case study of Ted Weschler’s 40-bagger in W.R. Grace.

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